From inventing the automobile to crafting some of the most iconic vehicles of our time, Mercedes-Benz has long stood as a symbol of luxury, precision, and engineering excellence.

But the road ahead is anything but smooth.

Caught between the electric vehicle (EV) revolution, intensifying competition from China, and mounting geopolitical tensions — including U.S. tariffs — Mercedes is facing the biggest transformation in the auto industry in over a century. And all of this while trying to protect the very things that made it great: brand power and margins.

In this issue, I break down what’s really going on at Mercedes. And beyond the company itself, we ask the bigger question: is the car industry — with all its capital intensity and volatility — just too tough for long-term investors?

— Daniel Mahncke & Shawn O’Malley

Mercedes’ History: Shorting Horses and Long Cars

The story of Mercedes-Benz is, in many ways, the story of the automobile itself. In 1886, Karl Benz patented the Benz Patent-Motorwagen, widely considered the world’s first gasoline-powered car. At the same time, Gottlieb Daimler and Wilhelm Maybach were building their own combustion engines. Although they worked separately at first, their ideas eventually converged to lay the foundation for what would become Mercedes-Benz.

The brand’s famous three-pointed star symbolizes the company’s roots, as it’s suppose to portray mobility across land, sea, and air known from the original Daimler Logo.

From the 1920s onward, Mercedes became a symbol of engineering ambition — building vehicles known for their performance, craftsmanship, and mechanical sophistication. Through the hardships of World War II, Mercedes, like many manufacturing companies, was forced to produce military components and vehicles.

After the war, it had to rebuild and chose to go cars-only, stopping the production of aircraft and boat engines. Mercedes played a central role in Germany’s industrial recovery. It was one of the first companies to restart exports in the late 1940s. The exports to the U.S. and other global markets brought in much-needed foreign currency and helped build the “Made in Germany” brand.

The 1950s and 60s brought legendary models like the 300SL "Gullwing," blending design and racing performance in a way few brands could match.

The formal launch of the S-Class in 1972 made official what had already become clear: Mercedes wasn’t just making luxury cars — it was defining the modern automobile itself, pioneering safety and technology features. But the car industry is a tough place…

International Competition – Part 1: Japan

Japanese cars, middle-class and premium, soon began gaining market share on Western roads, making life more difficult for Mercedes. Despite the brilliant engineering of the S-Class and Mercedes’ unmatched attention to detail, consumers were won over by cheaper but still high-quality and reliable Japanese cars.

Mercedes responded in two ways. First, it doubled down on positioning itself as a true luxury brand — a symbol of aspiration and success, not just technical superiority. Driving a Mercedes wasn’t just about the engineering anymore; it was about the image it projected.

Second, the company made targeted changes to its product strategy. It pulled back from its relentless pursuit of perfection at any cost, introduced smaller, more affordable models like the C-Class, and embedded cost-efficiency measures into its manufacturing without sacrificing the brand’s core identity.

The strategy worked. Rather than losing ground to Japanese rivals, Mercedes grew bigger, stronger, and more globally relevant than ever. But capitalism is brutal…

Today, decades later, Mercedes faces another era of disruption — this time defined not by mechanical excellence, but by electrification, software, and automation. And the new player is not Japan, but China.

Mercedes Business: Segments and Markets

But Mercedes is not the same company as back then. Today, Mercedes-Benz Group generates around €146 billion in revenue, divided across three business units: Cars, Vans, and Mobility.

The Cars division is the clear powerhouse, making up 75% of group sales and 68% of EBIT. In 2024, Mercedes sold about 2 million vehicles, with roughly a third of sales each coming from Europe and China, and 18% from the U.S. The GLC SUV is the clear favorite among American buyers, while Europe and China lean heavily on the GLC and the E-Class. And at the very top sits the S-Class, still dominating the global luxury limousine market with a staggering 50% share.

Profitability-wise, the Cars business ran at an 8% return on sales in 2024 — not record-breaking, but still solid considering the intense investment cycle around electrification and software right now.

The Vans division might seem small at first glance, but it punches well above its weight. Vans contributed 13% of group revenue but nearly a quarter of group EBIT in 2024, driven by a strong 15% return on sales. Mercedes sold about 400,000 vans last year, with Europe remaining the dominant market. While the Vans division rarely gets the same spotlight as the Cars division, its high margins and relatively stable demand make it a surprisingly strong profit engine inside the group.

Then there’s Mercedes-Benz Mobility, the group’s financial services arm, handling leasing, fleet financing, and insurance. It brought in 17% of revenue and 9% of EBIT. Mobility is a critical pillar for customer retention and steady cash flows, but it also carries headline risk: the division sits on around €110 billion in liabilities. That sounds alarming at first — but unlike traditional debt, this isn’t money borrowed to fund operations. Instead, it’s used to finance cars for customers and dealers, and is backed by matching financial assets like lease payments and vehicle collateral.

Think of it like a bank inside the company — lending to buyers, collecting interest, and holding the cars as security. Still, there is refinancing risk: much of this debt was issued when interest rates were near 1%, and renewing it at higher rates could pressure margins. Even so, the business remains vital to Mercedes' broader ecosystem by locking in customers and capturing more lifetime value per vehicle sold.

Put together, Mercedes-Benz today is much more than just a luxury carmaker — it’s a diversified automotive empire. But as China's influence on the global EV market surges, the question becomes: how well is Mercedes positioned to defend its territory when the battlefield shifts from mechanical dominance to electrification, software, and digital ecosystems?

The Shift: EVs and Cars as a Digital Product

In the new automotive world the competitive frontier has shifted: it’s not just about how a car drives — it’s about how it connects, updates, and interacts. The car is becoming a digital product on wheels, and success will depend as much on software ecosystems as on horsepower.

Mercedes-Benz was not as late to the EV party as it often seems. The problem has been that it’s difficult for incumbents to shift away from where they make most of their money and reinvent themselves. This is called the Innovator’s Dilemma.

Leading companies often fail to adopt disruptive technologies because their existing profitable businesses make them resistant to change. Investing early in unproven markets risks cannibalizing what already works — so they move too slowly until it’s too late.

This perfectly explains why incumbents like Mercedes hesitated: the combustion-engine business was highly profitable, while early EVs looked like a niche, low-margin distraction — making it rational (but risky) to delay an all-in EV pivot.

When it became obvious EVs would be the future, Mercedes started developing and launching its dedicated EQ lineup — spanning from the compact EQA to the flagship EQS.

But across many markets, the EQ lineup failed to resonate. Instead of feeling like true Mercedes-Benz products, the models came across as attempts to mimic Chinese EVs — and in the process, lost their identity. Signature design cues were softened, the tech lagged behind expectations, and real-world range left much to be desired. The result? A lineup that flopped commercially, with some models seeing sales drop by as much as 40% in just their second year.

International Competition – Part 2: China

Nowhere is the EV disruption more intense — or more critical — than in China. Mercedes-Benz has historically enjoyed strong brand prestige there, and despite the rising competition and headlines, it’s still holding its ground: today, Mercedes is the number two brand by revenue in China, trailing only BYD.

Even more impressively, Mercedes’ average selling price in China hovers around $60,000 — unrivaled by any other brand in the top 10 list, where most competitors operate at significantly lower price points.

But the pressure is building fast. Chinese consumers are moving quicker toward EVs than anywhere else in the world — and they’re demanding more for less: bigger screens, smarter software, faster updates, and aggressive pricing. Local brands like BYD and Nio are already strong, but newer players like Aito — backed by tech giant Huawei — are turning up the heat even further.

Aito’s latest EV models are priced at around $50,000-$60,000, closing the gap on Mercedes while offering highly demanded tech features that appeal to younger, digital-native buyers.

Mercedes’ traditional leadership in China is facing real risks. While it still dominates the combustion-engine luxury space, its EV offerings trail Tesla and leading Chinese EV brands in market share. Price cuts introduced in late 2024 show how competitive the battlefield has become — and hint at the underlying danger: if Mercedes is forced into a pricing war, it risks not just volume, but the brand prestige that has taken decades to build.

Reinventing the Star – Mercedes’ Digital Revolution

Mercedes knows it can’t win the next decade of competition with combustion engine cars. To defend its margins and its brand prestige, the company is going through a major shift: Going from ICEs to EVs and transforming the car into more of a digital product – better software, more features, generating more revenue and profits after the purchase of the car.

At the heart of that strategy is MB.OS, Mercedes’ new in-house operating system, set to roll out starting in 2025. MB.OS won’t just control entertainment and navigation — it’s designed to run the full car experience, from autonomous driving features to battery management to personalized digital services. Think of it less like a traditional car software update and more like creating an entire digital ecosystem, where upgrades, new features, and even performance improvements can be sold over-the-air.

If you ask industry bulls, this shift is about more than just improving the driver experience — it’s about a new business model. Car companies want to slowly move away from a one-time car sale toward ongoing digital revenue streams, much like Tesla already does. Premium navigation packages, enhanced driver-assist features, subscription services for entertainment, even performance unlocks — all of these could turn into high-margin recurring revenue once MB.OS is live across the lineup.

Tesla already generates around $2,000–$3,000 of software and service revenue per vehicle — a number Mercedes would love to match or exceed by the late 2020s. If successful, this would create a powerful second profit engine, less dependent on hardware cycles and macroeconomic swings.

But building a software-first culture is easier said than done. Mercedes has deep engineering roots, but creating seamless digital experiences, fast update cycles, and intuitive interfaces will require a different kind of DNA — one more common in Silicon Valley than Stuttgart. Seeing the new model, though, it looks like Mercedes pulled it off. But the bigger question might be: do its customers actually want it?

Tesla owners expect constant upgrades — and they’re happy to pay for them. Mercedes buyers, on the other hand, still lean heavily toward more “traditional” cars. For Mercedes, while it’s an intriguing vision, it’s still early days — more aspiration than execution. There’s little here you can confidently model or build an investment case around just yet.

Financials and Shareholder Returns

At this point, we’ve built a solid understanding of Mercedes — from its product strategy to its global footprint and evolving tech stack. But let’s zoom out for a second: does any of that actually matter? Or is the auto industry just structurally too tough to invest in?

We usually look for the classic compounder traits — most notably Return on Invested Capital (ROIC). And let’s just say… Mercedes doesn’t exactly pass that test. With a ROIC hovering around 6%, it’s far from exciting. The same goes for the stock chart — you’d be hard-pressed to find a less “compounder-like” trajectory.

No matter how exciting the narrative around “cars as digital products” may sound, the numbers make it clear: Mercedes won’t be able to escape the cyclicality of the car business through software — at least not any time soon.

But to be fair, I never expected Mercedes to be a classic compounder when I started digging in. That’s not the lens through which this story gets interesting. Time and time again, Mercedes has been a relatively quick 2x, 3x, or even 4x — when bought at the right price.

So the real question is: Do you have a brand here that’s temporarily undervalued because the market fears it’s losing relevance? And if so, is this a rare opportunity to buy into that brand at a deep discount?

In 2024, Mercedes generated €9 billion in industrial free cash flow, despite massive investments into EVs, software, and next-generation platforms. It also holds €31 billion in net industrial liquidity — giving it arguably the strongest balance sheet in the industry. It’s a rare combination: a business funding its transition and innovation agenda while also returning billions in buybacks and dividends. That doesn’t make Mercedes a compounder. But it might make an attractive value play.

The dividend alone tells part of the story. At today’s share price, Mercedes' dividend yield stands at just under 10%, one of the highest payouts across any major industrial company. But Mercedes isn’t stopping there. In early 2024, the company announced a €3 billion share buyback program, with the goal of retiring up to 10% of outstanding shares within just two years.

This capital return policy is a double-edged sword. On one hand, investors are being richly rewarded today: a dividend yield near 10%, and a €3 billion buyback plan aiming to retire 10% of shares in just two years. On the other hand, that kind of payout hinges on a level of financial strength that may be difficult to maintain if earnings disappoint, or if the EV and software bets take longer to pay off. Mercedes is trying to walk a fine line — acting like a mature cash machine, while also spending like a company in transformation.

That balancing act only works as long as the fundamentals hold up. If free cash flow starts to wobble, Mercedes may have to choose between funding the future and funding the shareholder. Right now, management is signaling it believes it can do both — but that confidence hasn’t yet been fully tested.

Historically, Mercedes has shown resilience through downturns. It didn’t need a bailout during the financial crisis, kept a steady footing during COVID, and carries one of the strongest balance sheets in the industry. But this time could be different. If the pressure doesn’t come from a macro shock, but from eroding pricing power or failed software execution, the fallback options may be limited. And for investors buying in based on today's payout, that’s the risk worth watching.

Valuation

With all the headwinds, you might wonder why I was interested in researching Mercedes in the first place. The reason comes down to a surprisingly simple calculation that reveals how much of the company's value is already accounted for by balance sheet assets alone.

Start with the Daimler Truck stake. After spinning off the division in 2021, Mercedes retained about 35% ownership. That holding is currently worth around €8.75 billion, or roughly €9 per share. Then there’s Mercedes-Benz Mobility — the company’s financing arm — which carries a book value of €13 billion. That translates to approximately €13.50 per share. And finally, there’s the industrial net liquidity. With €31.4 billion in cash and equivalents on the industrial side, that’s another €32.60 per share.

Add those together, and you’re looking at more than €55 per share in balance sheet value alone. At the current share price of €53 (48€ when Shawn and I recorded the podcast), the market is effectively assigning zero value to the entire car and van business.

Of course, that’s not because the market thinks Mercedes will stop selling cars. I also doubt that the market misunderstands Mercedes’ situation. What the current pricing reflects is deep uncertainty — about whether Mercedes can maintain its margins, pricing power, and long-term profitability in the face of intensifying Chinese EV competition and a still-unproven software strategy.

If, however, the core car business proves even modestly resilient, the current valuation begins to look seriously disconnected from reality. I’ve modeled that in my best case scenario of my valuation model. You can download it here. For now, however, let’s discuss the rather cautious base case.

The model starts with 2025 revenues of €138 billion, down by mid-single digits from 2024 — a reflection of the macro slowdown, EV softness, and tougher pricing in China. From there, I expect revenues to recover modestly, projecting a 1% CAGR through 2030.

Gross margins compress from 18.6% in 2024 to just 15% in 2025 and only gradually rise back to 17.5% by the end of the decade. The impact on EBIT will be even more significant. I expect it to drop sharply — effectively cut in half — due to much lower operating margins driven by the investment cycle and continued pricing pressures.

It’s a similar story with dividends. After paying €4.30 per share in 2024, I modeled the dividend to remain at a 40% payout ratio. However, due to shrinking profits, this would result in it being cut in half in 2025. From there, it trickles down, so the EPS sees a similar decline — although cushioned somewhat by the consistent 4% annual share count reduction. With the modest recovery I modeled for Mercedes, all the financials in 2030 would still be below 2024 levels, some of them significantly below.

Even then, discounting the 2030 share price and the cumulative dividends between 2025 and 2030 at an 8% rate gives us a present fair value (incl. dividends) of €54 — a bit higher than when I started my research. If you exclude dividends and only discount the terminal value, you land at €42 — highlighting how much of the investment case hinges on cash distributions. With the current stock at €53, the implied total shareholder return is about 10-11% annually in this base case. The best-case scenario shows how quickly that return can double — but the worst-case reminds us it can just as easily be cut in half.

If dividends were cut further, though, or buybacks paused, the market could punish the stock. But if Mercedes manages to execute on this steady climb back from the 2025 reset — without needing heroic assumptions — there could be an opportunity.

Portfolio Decision

Despite that, our decision has been not to add Mercedes-Benz to our Intrinsic Value Portfolio. As much as I like the brand’s strong balance sheet and reputation — as well as the attractive sum-of-the-parts valuation — the reality is that the automotive business remains brutally competitive. Margins are thin, capital intensity is high, and the winds of change — from electrification to geopolitical trade shifts — are blowing harder than ever.

So, even though the sum-of-the-parts valuation suggests a significant margin of safety, unlocking that value is easier said than done. Daimler Truck, the Mobility unit, and Mercedes’ balance sheet assets provide a cushion, but the core car and van business is facing both major secular and cyclical pressures. And in my worst-case scenario, there’s still meaningful downside.

The biggest concern remains China. For decades, Western luxury brands had unrivaled status. But sentiment is shifting. Chinese consumers increasingly see domestic brands as equal — even at the top end of the market. And as a new generation of Chinese luxury automakers emerges, competition will only get fiercer. In this environment, market share can vanish more quickly than expected, even for icons.

Mercedes is a great company. But it’s operating in a very tough industry. At today’s price, we’re staying on the sidelines. If you buy a value play, you have to pay close attention to the price. And Mercedes’ price is not in bargain territory yet.

Weekly Update: The Intrinsic Value Portfolio

Notes

• After adding to some positions in recent weeks and taking advantage of the market’s volatility, we didn’t make any new additions this week. That said, I’m confident a new position will find its way into the portfolio soon.

• As we’ve mentioned before, the goal isn’t just to build a portfolio — it’s to show you how to build it step by step. That means valuing companies carefully and building positions over time, rather than rushing in and deploying all the cash at once. In June, we’ll share a mid-year update on all our holdings — what’s changed since we bought them, and how we’re thinking about them going forward.
  

• As you can imagine, we’re always open to stock-pick suggestions — please leave a comment on this post or email us at [email protected] if you have any ideas!

Quote of the Day

"The best opportunities were the uncomfortable ones.”

— Anthony Bolton

What Else We’re Into

📺 WATCH: Chris Bloomstran discussing Berkshire Hathaway with Stig Brodersen

🎧 LISTEN: Interview with Mercedes CEO Ola Källenius on the Decoder Podcast

📖 READ: Pershing Square’s (Bill Ackman) Annual 2025 Shareholder Presentation

You can also read our archive of past Intrinsic Value breakdowns, in case you’ve missed any, here — we’ve covered companies ranging from Alphabet to Airbnb, AutoZone, Nintendo, John Deere, Coupang, and more!

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